Amid travel curbs due to the Covid pandemic that have flattened demand for cars in India, sales for tractors will remain stable due to expectations of well-distributed and normal rainfall, according to a report by rating agency CRISIL.
Despite a 37% on year decline in April and May combined sales, tractor volumes will likely be barely 1% below last fiscal’s level, in sharp contrast to a double-digit decline expected for the rest of the automobiles industry.
Lower raw material costs and strong balance sheets add to the stable outlook for the sector.
Two of India’s leading carmakers — Maruti Suzuki and Hyundai — saw sales plunging by over 80% on year in May, after registering near zero sales in the previous month due to a nationwide lockdown.
With most offices in metros expected to have a large section of employees working from home in coming months, car sales may remain far below pre-Covid levels for some time.
In contrast, the rural sector has emerged relatively unscathed by the pandemic and farm incomes are likely to hold up well.
The Indian Meteorological Department (IMD) has forecast the southwest monsoon to be at 102% of the annual average. The seasonal rainfall arrived on time in June and the showers were 21% above normal. But its early days yet as rainfall in July and August will be critical to the summer harvest.
“Apart from overall adequacy, monsoon needs to be spatially well-distributed – by geography and timelines — to propel farm incomes and stoke demand for tractors,” says Manish Gupta, senior director at CRISIL Ratings.
Rains to rescue
“The IMD’s forecast is very encouraging for tractor volumes this fiscal.”
Uneven distribution of rains — which have resulted in floods in parts of the country and drought in others in the same season — have often hit rural output in past years.
Tractor sales were down by 10% in the previous fiscal year due to poor rainfall distribution, while they were up by 8% the previous year due to favourable distribution though overall rains were below average.
An increase in minimum support prices by 3%-8% for summer crops also augurs well for rural demand this year, said CRISIL. Rural dealerships of tractors have been quick to bounce back from the lockdown with as many as 75% now open.
Locust attacks in parts of central and northern India did raise some concerns this year, but the bulk of crops escaped damage because sowing for the summer crops had not yet started.
“Operating profitability of tractor makers should remain strong at 15% this fiscal. Given limited capex needs, credit profiles are expected to remain healthy,” says Naveen Vaidyanathan, associate director at CRISIL Ratings.